Bob’s Journal for 12/1/22

Some Notable Events That Grabbed My Attention This Week

This week, I received, fresh from the printer, copies of my new book, “Retirement Watch: The Essential Guide to Retiring in the 2020s.” You can make a pre-publication order or learn more about the book by clicking here and here, respectively.

In this week’s subscriber-only teleconference, my publisher offered an opportunity to receive the book free. If you missed it, a replay will be posted on the members’ section of the website soon.

Twists in Year-End Tax Planning for 2022

Your year-end tax planning for 2022 is likely to be different than the last few years.

Many retirees should take a close look at their estimated tax payments and determine if they need to adjust their last payment, due Jan. 15, to avoid penalties.

Interest rates increased in 2022. A result is many people earned more interest income than in recent years. If you had a lot of money in taxable interest-earning accounts, your income could be substantially higher than last year and require higher estimated tax payments.

Mutual funds will be an unexpected source of income to many shareholders. Because of the strong returns the last few years, many funds held stocks with significant capital gains.

As stock prices declined in 2022, investors redeemed their fund shares. The funds had to sell some of those appreciated stocks to pay the redemptions.

A consequence at some funds is that investors who didn’t redeem their shares will have net capital gains distributed to them. On fund shares held in taxable accounts, they’ll owe taxes on those distributions, though they received no cash, and their fund shares are worth less than they were at the start of the year.

These investors also might need to increase their estimated tax payments to avoid penalties.

On the other hand, some people incurred losses on investments they sold from taxable accounts during 2022. These losses might reduce income taxes for the year. In that situation, you might want to reduce the final estimated tax payment for the year, so you won’t have to wait to receive a refund of the overpaid taxes.

Taxpayers who are over age 70½, charitably inclined and haven’t taken all of their required minimum distributions (RMD) for the year should consider making their charitable contributions from their traditional IRAs as qualified charitable distributions (QCDs).

When you make a QCD, the distribution from the traditional IRA isn’t included in your gross income but it counts toward your RMD for the year. See the April 2022 issue of Retirement Watch for details about QCDs.

Other taxpayers might want to bunch several years of charitable gifts in one year to ensure they can deduct some of the contributions by itemizing expenses on their income tax returns. One way to bunch the contributions is to give them to a donor-advised fund.

A third year-end charitable strategy is to contribute appreciated investment property from a taxable account to a charity. The entire fair market value of the investment on the date of the gift qualifies for a charitable contribution deduction, and the appreciation that occurred while you owned the property isn’t taxed to you.

Another strategy for people who haven’t taken their RMDs for the year is to take the RMDs by distributing shares of stock or mutual funds that declined in value during the year.

You don’t have to take an RMD in cash. Property can be distributed from the traditional IRA in what is known as an in-kind distribution.

The value of the shares on the date of the distribution counts toward your RMD and is included in your gross income.

That value also is the tax basis of the shares in your taxable account. That way, the future appreciation as the shares recover from the bear market is out of the traditional IRA and when you sell the shares will be taxed at capital gains rates instead of ordinary income rates.

Review Your Beneficiary Designations

I keep reminding people to review and update beneficiary designations, because I keep seeing cases in which people failed to do that. Their intended beneficiaries suffer from the oversight.

Your will and living trust don’t control who inherits certain assets, such as IRAs, 401(k)s, life insurance and annuities. Most of the time, only the latest official beneficiary designation determines the beneficiary, no matter what the other facts are.

In a recent case, a 401(k) account owner initially named her husband as beneficiary. The couple eventually divorced, and the marital separation agreement provided the ex-husband was to have no rights in the account.

The account owner submitted a change in beneficiary designation to the plan administrator, giving each of her siblings a 33½% interest in the account upon her demise.

But the plan rules stated that beneficiaries could be allocated only whole number percentages with no fractions.

The administrator didn’t implement the change, because it didn’t satisfy the rules. It attempted to notify the account owner that the proposed change wasn’t implemented and sent 11 annual account statements showing the ex-husband as the beneficiary.

The account owner died without taking any additional action. The plan administrator distributed the entire account to the ex-husband.

The estate administrator sued the plan administrator.

The court ruled the plan administrator acted properly by following its written policies in rejecting the account owner’s request to change the beneficiary designation and in distributing the account to the ex-husband after the account owner passed away.

In a small victory for the estate, the appeals court ruled that the marital separation agreement and other facts created a factual issue of whether the ex-husband effectively waived or disclaimed all his rights to the account. The court ruled a jury could decide whether the husband had any rights to the account.

But at this point, the estate has incurred significant legal expenses bringing the case to the appeals court and could incur the additional expenses of a jury trial.

The intended heirs, if they receive anything from the account, will receive substantially less than intended because of the legal fees. It would be better to take a few minutes every few years to ensure all beneficiary designations are updated.

Gelschus v. Hogen, 8th Cir., No. 21-3453 (Aug. 29, 2022).

Estate Tax Collections Almost Double

Federal estate tax collections in 2021 were $18.4 billion. That’s about twice the $9.3 billion collected in 2020 and might be the most ever collected from the tax.

Three factors likely caused the sharp increase despite the high level of the federal estate tax exemption.

The pandemic had two effects on 2021 estate taxes.

One effect, of course, is that more people died than normally would have, increasing the number of estate tax returns filed and the number of people paying estate taxes.

Another effect is that, because much of the economy was shut down in 2020, some estates delayed filing their tax and filed them in 2021 instead of 2020.

Estates have at least 15 months to file their returns and the IRS was liberal with penalty-free extensions during the pandemic, so tax returns filed in 2022 can include the estates of people who died in late 2019 or perhaps earlier, as well as those who died after that.

In 2019, 6,409 estate tax returns were filed. Only 3,441 were filed in 2020, but 6,148 were filed in 2021.

Another factor was that estates were worth more in 2022 than in previous years because of the sharp increases in prices of stocks, real estate and other assets during 2020 and 2021.

Estimates are that only 0.08% of the people who died in 2020 were subject to the estate tax.

Here’s some more interesting estate tax return data from the IRS.

The gross value of estates filing returns in 2019 was $159.6 billion. It slumped to $122.3 billion in 2020 but rose to $189.6 billion in 2021.

In 2019, 48% of estates filing returns were taxable. The percentage fell to 37% in 2020 but increased to 52% in 2021.

Though 2020 had fewer returns filed, total charitable donations were highest for 2020 at $27.4 billion. Total charitable donations on estate tax returns were $21.9 billion in 2019 and $24.5 billion in 2021.

Estates that filed returns in 2021 had a total value of $189.6 billion. The most valuable assets in those estates were publicly traded stocks at $29.9 billion. The next most valuable were bonds ($11.6 billion) and cash ($8.3 billion). Stocks of closely held corporations and real estate were next at about $6 billion each.

The Data

Retail sales increased 1.3% in October after being unchanged in September. October’s retail sales were the highest monthly increase in eight months.

Excluding gasoline and autos, retail sales increased 0.9% in October.

During the past 12 months, retail sales rose 8.3%.

Keep in mind that the retail sales data aren’t adjusted for inflation, so they could indicate price increases instead of volume increases.

Existing home sales fell 5.9% in October. That’s the ninth consecutive month of declines and brought the number of monthly sales to the lowest level since December 2011, except for a few months during the pandemic.

New home sales reversed a trend by increasing 7.5% in October after declining 11.1% in September.

But housing starts declined 4.2% in October following a 1.3% dip in September. New building permits also declined by 2.4% in October.

Home prices declined 1.5% in September, according to the S&P Corelogic Case-Shiller Home Price Index. That follows a 1.6% dip in August and is the third consecutive month of price declines.

Over 12 months, the index still is up 10.4%, but that’s well below the 13.1% growth rate at the end of August.

September’s is the lowest 12-month increase since December 2020 and the fifth consecutive month the 12-month increase was lower than the previous month.

The FHFA House Price Index was a little less negative. It gained 0.1% in September after falling 0.7% in August. Over 12 months, the index is up 11%, which is lower than the 11.9% gained at the end of August.

The Consumer Sentiment Index from the University of Michigan was 56.8 at the end of November. That’s up from 54.7 at mid-month but down from 59.9 at the end of October.

All factors in the index generally were worse than at the end of October but better than in mid-November.

Durable goods orders increased by 1% in October following a 0.3% climb in September. Excluding defense and transportation goods orders, which is considered a good measure of business investment, orders increased 0.7% in October following a 0.8% decline in September.

Manufacturing activity appears to be slowing. The PMI Manufacturing Index declined to 47.6 in November from 50.4 in October. A reading below 50 indicates a contraction.

The PMI Service Index also declined in November, to 46.1 from 47.8 in October. The PMI Composite Index for the economy was 46.3 in November after falling to 48.2 in October.

The Dallas Fed Manufacturing Survey indicated the sector is contracting in Texas. The Production Index derived from the survey was 0.8 in November, down from 6 in October.

In addition, the General Business Activity Index was negative 14.4 in November. That’s an improvement from negative 19.4 in October, but still indicates reduced activity.

The Richmond Fed Manufacturing Index improved to negative 2 in November from negative 8 in October.

The Philadelphia Fed Manufacturing Index was negative 19.4 in November, down from negative 8.7 in October. November’s level is the lowest since May 2020.

The Kansas City Fed Manufacturing Index improved to negative 10 in November from negative 22 in October. The October level was the lowest since May 2020, and the November level is the second-lowest mark since that date.

Only 127,000 new private sector jobs were created in November, according to the ADP Employment Report. That’s the lowest number since January 2021.

Manufacturing lost 100,000 jobs during the month, and professional and business services lost 77,000. But the leisure and hospitality sector gained 224,000 jobs during the month.

New unemployment claims increased by 17,000 to 240,000 in the latest week. The increase was due to a combination of layoffs in the technology sector and a technical adjustment in the government’s model.

Continuing claims increased for the sixth consecutive week to 1.551 million. This is the highest level since the first week in March.

The second estimate of third-quarter gross domestic product (GDP) was that GDP increased at an annual rate of 2.9%. That’s an improvement from the 2.6% rate in the initial estimate.

Consumer and business spending were revised higher. Net trade also improved with exports revised higher and imports revised lower.

The Markets

The S&P 500 fell 1.17% for the week ended with Tuesday’s close. The Dow Jones Industrial Average lost 0.73%. The Russell 2000 tumbled 1.27%. The All-Country World Index, excluding U.S. stocks, added 0.86%. Emerging market equities gained 2.05%.

Long-term treasuries gained 0.49% for the week. Investment-grade bonds lost 0.12%. Treasury Inflation-Protected Securities (TIPS) fell 0.21%. High-yield bonds decreased 0.27%.

On the currency front, the U.S. dollar declined 0.14%.

Energy-based commodities lost 2.45%. Broader-based commodities fell 1.21%. Gold rose 0.48%.

Bob’s News & Updates

My next book will be “Retirement Watch: The Essential Guide to Retiring in the 2020s.” The official publication date is Jan. 3, 2023. I encourage you to make a pre-publication order or learn more about the book by clicking here and here, respectively.

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It’s received mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.